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Great Wealth Strategy to Share

At TriDelta we have a client who is a doctor in his early 60s. We have just saved him roughly $400,000 by implementing a relatively simple but little known planning strategy. We call it PCIS – or Personal Corporate Insurance Swap.

This is a strategy that can add significant wealth – even though most people who could benefit, are unaware of it.

PCIS is one of those strategies that certainly doesn’t apply to everyone – but the great thing is that you probably know someone who can benefit. Here is your chance to do them a great favour by putting this article in front of them.

Here is who can benefit:

Someone who has a company.

This can be a business owner, a professional with a corporation (Doctor, Dentist, Lawyer, Accountant, Architect, etc.), or someone who set up a holding company.

AND they own life insurance outside of their company.

This can include various forms of life insurance (term or permanent) held by any owner of the corporation. This often means either spouse as well as their adult children.

If someone fits this criteria, then there is a decent chance that they can benefit from PCIS.

To help explain the strategy I will use the real life example of our doctor client:

In the 1980’s he took out life insurance on himself and his wife. A few years ago, when doctors could become incorporated, he set up a medical professional corporation.

While most people don’t think about this, the older you get, the more valuable your life insurance policy becomes. If you suffered a health problem since you set up your life insurance, your life insurance policy becomes more valuable. The key point is that your life insurance policy has a real, tangible value.

This is important to this strategy as the next step is to use the following piece of the tax code (S. 148). I will get a bit technical here. Although very broad, there are subsections which effectively state that when you transfer a life insurance policy to a corporation that is non-arms length, it will result in a deemed disposition based on a formula. The formula is the Cash Surrender Value of the policy (CSV) LESS the Adjusted Cost Base (ACB). However, the individual is entitled to the Fair Market Value (FMV) of the policy regardless of whether this is greater than the CSV. This essentially means that the corporation can pay to the shareholder (either in cash or a promissory note) an amount equal to the FMV LESS the ACB of the policy. The corporation’s ACB to acquire this policy is the CSV, not the FMV.

This is a bit complicated, but here is the impact:

For our client, their $2 million life insurance policies that they took out in the 1980s, have an appraised FMV of $1,200,000 today. This was appraised by an actuary. With this official appraisal, the clients then transfer ownership of these insurance policies worth $1,200,000 to their corporation in exchange for $1,200,000. Given that these policies do not have any CSV, there is no tax implication to the transfers.

This provides them with two substantial benefits.

The first is that it allowed them to take out $1,200,000 from their corporation tax free. At an average dividend rate of 30%, that saves them $360,000.

The second is that from this point forward, they can pay all of their insurance premiums from the corporation using pre-tax money. Over the rest of their life, this will save tens of thousands of dollars.

This swap raises an obvious question. If the corporation owns the insurance policies, how will they get the insurance proceeds out of the corporation when the time comes?

Fortunately, life insurance proceeds are structured in such a way so that each $1 in insurance proceeds adds $1 to the Capital Dividend Account (CDA)of the corporation LESS every dollar of ACB. For every dollar in the CDA of a corporation, a company is able to dividend out $1 tax free. Effectively, holding the insurance within the corporation should result in the exact same benefit at the end as holding the insurance personally. It should be noted that the ACB of a life policy typically drops to $0 over time, and for most people at life expectancy, their policy ACB should be $0 – resulting in no tax implications to the shareholders.

Of course, no good strategy is that simple.

Some issues to consider before implementing the PCIS:

You can only do this PCIS once. Does it make sense to do this now or to wait until the insurance policies are worth more?

There is some costs to doing this (usually $5,000 to $10,000) for actuarial and professional advice. Do the benefits meaningfully outweigh the costs?

How does PCIS fit within the overall financial plan. Is there sufficient value in the corporation today to make the strategy fully beneficial? Should the funds come out of the corporation now or is it better to keep them in the corporation but keep it as a demand loan?

Will you be selling your corporation at some point in the future? If so, you want to be careful where exactly you hold the insurance, as you don’t want to complicate a sale. If done correctly, this issue can probably be avoided.

Is there a sizable deemed disposition on the transfer? You will want to know the Cash Surrender Value and the Adjusted Cost Basis of your policies before proceeding.

In order to make this strategy work for you or someone you know, you want to be sure to work with an insurance and estate planning specialist with significant corporate tax knowledge – like we provide at TriDelta. They should be able to help you determine if this strategy makes sense to use, how to use it, and to hand hold you through the process.

If it does work for you or someone you know, it can be a rare and significant financial win.